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Real estate a drag on Fidelity’s Asean fund

Southeast Asia equities will likely be buoyed by economic growth in 2018, but real estate developers in the sub-region have hit the performance of the Fidelity Asean Fund, managed by Gillian Kwek.
Man standing on house under construction

Kwek’s fund invests in companies listed on the exchanges in Singapore, Malaysia, Thailand, the Philippines and Indonesia. The strategy is intended for investors with a long-term horizon of at least five years, she said.

Over the last 12 months, the fund underperformed the index because of certain holdings in the real estate and materials sectors, according to Kwek.

In real estate, an overweight stance in Philippines-based Robinsons Land was a detractor because high interest charges from a property project in Chengdu was a drag on earnings, she said. Indonesian real estate developers Ciputra Development and Summarecon Agung also fell on expectations of lower pre-sales amid weakness in the Indonesian property sector.

Among materials, positions in Cemex Holdings Philippines and Holcim Philippines detracted from performance.

“The former fell as its earnings fell below consensus estimates. The latter declined as intensifying competition and rising costs are likely to weigh on earnings in the near term.”

Contributors to performance over the past 12 months were the electronics and energy sectors, she said.

Electronic inspection equipment maker Vitrox, based in Malaysia, gained as quarterly earnings surpassed expectations, based on “capacity expansion plans as well as focus on customer relationship-building and product innovation”.

Venture Corp in Singapore, a contract manufacturer of electronics, beat earnings expectations, “driven by its diversified customer base and continued strong execution of customer programmes launched in previous quarters”, Kwek said.

“In the energy space, the exposure to Thailand-based PTT enhanced gains as higher crude oil prices, lower gas costs and capacity expansion at its gas pipelines are likely to support its earnings outlook.”

Singapore overweight

Kwek uses a bottom-up stock selection approach and focuses on large and medium-sized companies. She looks at the scalability of a company’s business model, cash flow and corporate governance.

Her fund has been overweight Singapore equities for the last three years, something that she doesn’t intend to change in the short term.

Compared to neighbouring countries, Singapore-based companies have a higher level of corporate governance and cheaper credit, she said. Additionally, many Singapore companies derive their revenues outside the country, making them a regional play.

She cited DBS, the top holding (6.4%), as an example. The bank is headquartered in Singapore but with operations in China, Taiwan, Hong Kong, India and Indonesia.

UOB, another Singapore-based bank, is the second largest holding (5.3%).

In fact, seven out of the top ten holdings are in Asean banks, together accounting for 26% of the fund on 31 October, according to FE data.

However, the downside of Singapore is the high cost base compared to neighbouring countries, particularly for companies in the consumer and materials sectors.

“From a currency point of view, Singapore companies find that they can’t compete with others that have a weaker currency. Hence they are always on the treadmill, figuring out how to lower costs, how to make sure that they offer value for their price. Lowering costs is a constant battle.”

Shockproof Asean?

Major Asean economies are expected to grow on average around 5.2% in 2018, according to the IMF.

In 2018, Kwek likes the Philippines retail sector because it is a consumer-driven economy and disposable income is rising.

In Malaysia, she likes the property sector, which she believes has bottomed out. ”A lot of companies are trading at book or below book value and the balance sheet of the majority of the companies is relatively healthy.

In Thailand, she sees opportunities in the tourism sector. “Chinese tourists have discovered Thailand in the past few years”.

However, volatility and capital outflows could be on the horizon. Falling oil prices would impact Malaysia’s economy and expected US interest rate hikes could upset local currencies across the sub-region.

Kwek believes that Southeast Asia equities are well equipped to withstand potential external shocks, including geopolitical tensions caused by North Korea.

“Domestic liquidity is good and currencies are [stable] for all of [Southeast Asia]. Usually the biggest risk to any emerging market would be currency. But since right now fundamentals are good, they should recover if something happens,” she said.

In addition to the Asean fund, Kwek also manages single Asian country funds for Fidelity focused on equities in Indonesia, Malaysia, Singapore and Thailand.

Below is the five-year performance of the Fidelity Asean fund versus the sector and the benchmark.

Source: FE. In US dollars.

Part of the Mark Allen Group.